Recent updates from the International Monetary Fund, the OECD, and market analysts point to subdued GDP growth in the eurozone for 2026. This would confirm the conventional view that the eurozone is a structural underperformer compared to, for example, the US whose GDP is expected to grow at a much higher rate next year.
Eurozone growth has gained momentum
However, growth is already set to surpass expectations in 2025. Last June, the European Central Bank (ECB) forecast sub-1% growth this year, but the latest data suggest an expansion of at least 1.4%, exceeding estimates of potential growth. Activity strengthened in the second half of the year, with the composite purchasing managers’ index reaching 52.8 in November, the highest in two-and-a-half years, signalling further upside.
The rebound is being driven primarily by domestic demand, reducing the region’s reliance on global trade and suggesting that the fiscal stimuli announced earlier in 2025 are beginning to filter through. Germany is a case in point: industrial output has risen strongly after the summer following a long stagnation.
Government spending is poised to remain supportive. Berlin’s commitment to spend over €1 trillion on multi-year defence and infrastructure programmes, and the energy transition may lift GDP by more than 1.5 percentage points and improve long-term potential growth, according to the German economic advisers. If deployed efficiently, such investment could catalyse higher private-sector investment and strengthen labour markets.
Financial conditions also provide grounds for cautious optimism. Credit flows to the private sector have returned to levels last seen before the ECB started raising interest rates in 2022. Growth in M3 money supply — and notably its most liquid component M1 — points to stronger consumption, although the link between money supply and overall GDP growth is less stable than in the past.
Consumers will benefit from lower energy prices, including oil, natural gas, and electricity, which should boost household purchasing power. In the eurozone, each one-percentage-point decline in energy bills translates into a 0.1% rise in households’ real disposable income.
Risks to the outlook look balanced in our view. Faster-than-expected spending on defence and infrastructure could support growth and employment. A resilient global trade environment would lift demand for European exports. Conversely, geopolitical tensions, particularly surrounding Russia and Ukraine, could undermine confidence and curtail spending and investment.
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